Manufacturing Labor Productivity Grew Modestly in the Second Quarter

The Bureau of Labor Statistics reported that manufacturing labor productivity grew modestly in the second quarter, up 2.5 percent, rebounding from the 0.3 percent gain seen in the first quarter. It was the third straight quarterly increase in productivity in the sector, improving from two consecutive declines in mid-2016. In this release, manufacturing output rose by 1.6 percent, slowing somewhat from the first quarter’s 2.4 percent increase. The increase in productivity stemmed from a 0.9 percent decrease in hours worked, and as a result, unit labor costs edged down 0.3 percent in the second quarter.

There were large sectoral differences in the data, with labor productivity for durable goods firms jumping 3.8 percent in the second quarter and bouncing back from a 0.9 percent decline in the first quarter. Durable goods output was up 0.9 percent in the second quarter, with unit labor costs off by 0.8 percent. In contrast, labor productivity for nondurable goods manufacturers inched down by 0.1 percent in the second quarter, off from a 2.6 percent gain in the first quarter. Nondurable goods output rose 2.3 percent in the latest data, its best quarterly increase in just over four years, but this was offset by more hours worked. Unit labor costs for nondurable goods businesses increased by 1.2 percent.

Overall, this report represents some progress in terms of overall manufacturing productivity, but the longer-term trend remains a concern. Labor productivity in the sector has been essentially stagnant since the Great Recession, down 0.05 percent, and in 2016, it averaged just 0.2 percent. Through the first half of 2017, the annual rate was 1.4 percent. Still, that is well below the 5.2 percent pace for manufacturing output per worker experienced from 2002 to 2008. In general, manufacturers have benefited from being leaner, but the recent sluggishness in productivity and output growth has meant that unit labor costs have risen 9.0 percent since the end of 2011.

In the larger economy, nonfarm labor productivity increased by 0.9 percent in the second quarter, an improvement after eking out a 0.1 percent gain in the first quarter. Nonfarm output rose 3.4 percent in the second quarter, its fastest rate in more than two years, with hours worked and unit labor costs up 2.5 percent and 0.6 percent, respectively. Similar to the manufacturing data described above, nonfarm labor productivity has slowed considerably since the Great Recession, averaging 0.5 percent per year from 2011 to 2016. It was up by only 0.2 percent in 2016, with an annualized 0.5 percent increase through the first half of 2017. This compares to 2.7 percent growth from 2000 to 2007.

Chad Moutray is chief economist for the National Association of Manufacturers (NAM), where he serves as the NAM’s economic forecaster and spokesperson on economic issues. He frequently comments on current economic conditions for manufacturers through professional presentations and media interviews. He has appeared on Bloomberg, CNBC, C-SPAN, Fox Business and Fox News, among other news outlets.